Business Asset Disposal Relief: shares or securities: Enterprise Management Incentive Scheme shares
You should check the other guidance available on GOV.UK from HMRC as Brexit updates to those pages are being prioritised before manuals.
Entrepreneurs’ Relief was renamed in Finance Act 2020 with effect from 6 April 2020. The new name is generally used in this guidance but should be read as applying to times before that date.
TCGA92/S169I (7A) to (7R) and FA13/S64 and Sch24 EMI shares may qualify for relief
For disposals on or after 6 April 2013 it is possible for shares acquired under the EMI scheme to qualify for relief where the “personal company” requirement is not met. Either Condition C or D (see TCGA92/S169I) must be met for a disposal of shares to be a material disposal.
To qualify for relief the share must -
- have been acquired on the exercise of a qualifying option granted under the EMI scheme (ETASSUM50000+),
- have been acquired since 6 April 2012 (but see below regarding shares acquired before 6 April 2013),
- be disposed of at least two years after the grant of the option, and
- either Condition C or D must be met.
To meet Condition C, throughout the two year period ending with the disposal the company must have been a trading or the holding company of a trading group and the individual must have been an employee or officer of the company, or a company in the same trading group.
To meet Condition D, throughout the two year period ending with the date when the company ceases to be a trading company or the holding company of a trading group, the company must have been a trading company or the holding company of a trading group and the individual must have been an employee or officer of the company, or a company in the same trading group.
- The cessation date must be within the period of 3 years ending with the date of disposal.
The two year rule was only one year where the disposal was before 6 April 2019. If the disposal is on or after 6 April 2019 and the date of cessation was before 29 October 2018 then the two year period was only one year.
The first date of the period of 2 years
The legislation refers to options being granted “on the first day of the period of 2 years”. The date of disposal is the last day of that period of 2 years and the option grant date must therefore be, or be before, the first. So for example, if the last day is 17 April 2019, the first day of the 2 year period was 18 April 2017 meaning that the option could have been granted on 18 April 2017 or earlier.
The legislation and this guidance refers to EMI shares issued from 6 April 2012 that are eligible for relief as “relevant EMI shares”.
However, where there is a company reorganisation during the time an EMI option is held, such that there is a replacement option within the EMI rules (see CG56387), then the two year period referred to above may include the two (or more) options and the employment requirement is to be met by reference to the corresponding company or group.
Where relevant EMI shares have been issued and are replaced by others in a share reorganisation then the new shares will also be eligible for the relief where either of the following conditions is met:
- where there is a reorganisation of shares of a single company within TCGA92/S126, [TCGA92/S169I(7F)(c)(i)], or
- where the EMI shares are exchanged for shares in another company and the exchange meets the conditions needed for the EMI rules for replacement option to apply [TCGA92/S169I(7F)(c)(ii) and (7G)].
For other types of share reorganisation, the replacement shares will not attract relief as relevant EMI shares. Note that an election may be made under TCGA92/S169Q which would have the effect of disapplying the usual “no disposal” treatment of TCGA92/S127 so as to trigger gains against which relief may be claimed. Note also that the relief may also be claimed against gains triggered by the effect of TCGA92/S128 in cases where the individual receives consideration in addition to an issue of new shares.
The usual share identification rules are modified so that relevant EMI shares will not form part of a “share pool” under TCGA92/S104 and also they will not be identified with any other shares for the purposes of the rules that apply to same day transactions or where shares of the same class are acquired within 30 days of a disposal, TCGA92/S105 and TCGA92/S106A(5).
Instead, for disposals by an individual of shares of the same class on or after 6 April 2013 of relevant EMI shares will be identified in the following way -
- Firstly, with shares acquired on the same day, but applying the rule in TCGA92/S105 separately to relevant EMI shares and other shares of the same class.
- Secondly, with shares acquired within the 30 days following the disposal, again applying the rule in TCGA92/S106A(56) separately to relevant EMI and other shares of the same class.
- Then with relevant EMI shares on a “first in, last out basis”, because this maximises the holding period.
- Lastly, with the other shares of the class, which would normally form a share pool under TCGA92/S104.
EMI Shares acquired during the 2012-13 tax year
Treating EMI shares acquired in 2012-13 as eligible for Business Asset Disposal Relief causes a complication in that any disposal of shares of the same class in that year would have been a part disposal of the TCGA092/S104 “pool”. If the EMI shares were automatically treated as eligible for Business Asset Disposal Relief then the calculation of gains for that year would be affected retrospectively. Therefore the following rules apply for EMI shares acquired in 2012-13 -
- where there were no disposals of shares of the same class during 2012-13, the EMI share acquired in that year will automatically be treated as relevant EMI shares, eligible for relief,
- where there were disposals of shares of the same class during 2012-13, the individual may elect for the EMI share acquired in that year to be treated as relevant EMI shares, eligible for relief.
Where an election is made the effect for disposals made during 2012-13 is that -
- relevant EMI shares acquired in 2012-13 will be treated as being disposed of after any other shares of the same class, so as to obtain the benefit of the relief on disposals from 6 April 2013,
- where any such shares that are identified with a disposal, it is on a “last in, first out” basis, so as to carry forward the shares with the longer holding periods.
Note that this rule also applies where EMI shares issued in 2012-13 were subject to a reorganisation that meets the conditions for the new shares to be treated as relevant EMI shares [see above].
There is no prescribed form but under the normal self assessment rules an election should be made as part of a return where a notice to file has been issued.
The time limit for making or revoking an election is the filing date for the 2012-13 return. The rules that would allow for later amendments to claims and elections do not apply.
Example of effect of election
At beginning of 2012-13 individual has holding of 100 shares at a cost of £80. In 2012-13 acquires a further 50 shares on exercise of EMI options at cost of £50. Disposes of 80 shares in 2012-13 for proceeds £120.
No election - shares are added to pool which becomes 150 shares at cost £130.
Gain is £120 - (80/150 x £130) = £120 - £70 = £50.
Election made - shares are kept from pool and disposal is identified with pool.
Gain is £120 - (80/100 x £80) = £120 - £64 = £56. But the 50 EMI shares potentially qualify for relief.